We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards AquaVenture Holdings Limited (NYSE:WAAS).
Is AquaVenture Holdings Limited (NYSE:WAAS) a sound investment today? Investors who are in the know are getting less bullish. The number of long hedge fund positions shrunk by 1 recently. Our calculations also showed that WAAS isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a peek at the latest hedge fund action encompassing AquaVenture Holdings Limited (NYSE:WAAS).
What have hedge funds been doing with AquaVenture Holdings Limited (NYSE:WAAS)?
At Q2's end, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in WAAS over the last 16 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Renaissance Technologies holds the largest position in AquaVenture Holdings Limited (NYSE:WAAS). Renaissance Technologies has a $9.1 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On Renaissance Technologies's heels is Ardsley Partners, led by Philip Hempleman, holding a $5.7 million position; 0.9% of its 13F portfolio is allocated to the stock. Some other professional money managers that hold long positions comprise Ken Grossman and Glen Schneider's SG Capital Management, Perella Weinberg Partners and Chuck Royce's Royce & Associates.
Due to the fact that AquaVenture Holdings Limited (NYSE:WAAS) has experienced bearish sentiment from the entirety of the hedge funds we track, we can see that there lies a certain "tier" of funds who were dropping their entire stakes in the second quarter. Intriguingly, Richard Driehaus's Driehaus Capital dropped the largest position of the 750 funds watched by Insider Monkey, worth close to $3.6 million in stock. Gregg J. Powers's fund, Private Capital Management, also dropped its stock, about $1 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 1 funds in the second quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as AquaVenture Holdings Limited (NYSE:WAAS) but similarly valued. We will take a look at Mechel PAO (NYSE:MTL), Caesarstone Ltd. (NASDAQ:CSTE), LAIX Inc. (NYSE:LAIX), and First Community Bankshares, Inc. (NASDAQ:FCBC). This group of stocks' market valuations resemble WAAS's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MTL,2,1365,-1 CSTE,9,23923,3 LAIX,2,2144,0 FCBC,3,9257,-1 Average,4,9172,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4 hedge funds with bullish positions and the average amount invested in these stocks was $9 million. That figure was $20 million in WAAS's case. Caesarstone Ltd. (NASDAQ:CSTE) is the most popular stock in this table. On the other hand Mechel PAO (NYSE:MTL) is the least popular one with only 2 bullish hedge fund positions. AquaVenture Holdings Limited (NYSE:WAAS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately WAAS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on WAAS were disappointed as the stock returned -2.7% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.